Key Takeaways

• Whether securities issued in data center securitizations are “asset-backed securities” under the Exchange Act has been an open question since the market began to develop.
• The SEC staff has provided guidance on that question for data center securitization structures where the issuer owns or has rights to operating data center facilities and related assets. The analysis turns on deal structure: what the issuer owns, what supports repayment and whether investors are exposed to operating data center assets rather than solely a pool of self-liquidating financial assets.
• For transactions consistent with the facts addressed, the staff guidance may support an analysis that certain securitization-specific requirements—including Regulation RR, Rule 192, Rule 15Ga-1 and Rule 15Ga-2—are not applicable.
• The reasoning may be relevant beyond data centers to whole business, fiber, tower and other operating-asset financings, while application to GPU and other AI-infrastructure financings more closely tied to leases, rentals, usage payments, residual value or remarketing warrants caution.

Background

Data centers were historically financed largely on a corporate and balance-sheet basis through corporate bonds, bank credit facilities and joint-venture equity. As artificial intelligence (AI)-driven demand has increased capital needs for new data center capacity, sponsors have increasingly turned to the securitization markets for more efficient, longer-tenor capital and to recycle balance-sheet capacity for continued development. The first data center securitization priced in 2018. Issuance was modest for several years before accelerating meaningfully beginning in 2021, and data center securitization is now one of the fastest-growing segments of the structured finance market.

In practice, data center securitization has generally developed along two tracks. One is “CMBS-style,” typically a single-asset, single-borrower commercial mortgage-backed securities  (SASB CMBS) format, where investors are paid from the cash flow of a mortgage loan secured by one data center asset or a discrete portfolio. The other is the “ABS-style” structure, where the issuer owns or has rights to operating data center assets and related contracts, and repayment is supported by net operating cash flow from the facilities.

The regulatory question has been whether securities issued in the “ABS-style” structure should be treated as “asset-backed securities” as defined in Section 3(a)(79) of the Securities Exchange Act of 1934, commonly referred to as “Exchange Act ABS”. That definition turns on whether investors are paid primarily by self-liquidating financial assets, such as loans, leases, mortgages or receivables, that convert into cash over time.

“ABS-style” data center securitizations do not fit that definition neatly. Customer contracts—and sometimes leases—matter, but they are only part of the picture. Payments come from contract revenue, but that revenue is reduced by the cost of operating the facilities, including power, cooling, connectivity, security, customer procurement and renewals, and ongoing active management.

Recently, the law firm Latham & Watkins wrote to the Securities and Exchange Commission (SEC) requesting guidance on this structure. Its letter described a special-purpose issuer that owns, leases or otherwise has rights to data center facilities and related assets and contracts, directly or through asset entities, and issues securities backed by those assets. The letter also noted that most data center securitization transactions use master trust-style features for future issuances, refinancings and collateral changes, and distinguished those transactions from SASB CMBS, where the issuer holds a mortgage loan rather than the operating data center assets themselves.

The SEC Staff Guidance

The SEC staff stated that the securities issued in the structure described in Latham’s request letter are not Exchange Act ABS. The reasoning: the issuer holds operating data center assets that can endure beyond the securities and may appreciate in value—not merely financial assets that self-liquidate by their terms.

The guidance has limits. It reflects a staff view, not Commission action, and it depends on the facts presented. Change the facts, and the answer could change. Its reach is nevertheless meaningful because Exchange Act ABS status can affect the application of requirements including Regulation RR, Rule 192, Rule 15Ga-1 and Rule 15Ga-2.

Practical Implications

• Regulatory effect: For transactions that align with the facts described in the request letter, the staff guidance may support an analysis that Regulation RR risk retention, Rule 192 conflicts restrictions, Rule 15Ga-1 repurchase demand reporting and Rule 15Ga-2 third-party diligence reporting are not applicable. Each requirement should still be assessed separately based on its own scope, definitions and any independently applicable obligations. Some sponsors had already taken the position, on a deal-by-deal basis, that their structures fell outside the Exchange Act ABS definition. The guidance now provides staff-level support for that view.
• Self-liquidating distinction: The request letter draws a clear contrast between SASB CMBS, where the issuer holds a self-liquidating mortgage loan, and “ABS-style” data center securitizations, where the issuer owns or has rights to operating assets. That distinction may extend to other asset classes, but only where the transaction facts support it.
• Structure choice: The staff guidance adds a regulatory dimension to the data center securitization-versus-CMBS decision. For sponsors with growing multisite portfolios, a data center securitization platform may offer advantages where repeat issuance and collateral growth are important. SASB CMBS may still be a better fit for large single-facility financings where CMBS pricing, investor demand or real estate execution carry more weight.
• Execution remains central: Structure choice will continue to be driven by commercial execution—which structure can be priced and closed most efficiently on the best terms, given market conditions, investor demand and the sponsor’s existing platform.
• Market practice: In practice, many sponsors were already retaining residual risk well above the 5% Regulation RR threshold and may continue to do so, although without the Regulation RR requirements, sponsors will be able to hold the risk more efficiently. Investor, rating agency and credit committee expectations may continue to drive reporting, diligence and control features even where particular Exchange Act ABS-related requirements are not applicable.
• Future rulemaking: This is not necessarily the last word on this question. Commission-level action remains possible, and the Commission could revisit, refine or supersede the boundary reflected in the staff position.

What This Means Going Forward

The main takeaway is not that data center securitizations receive a special label. It is that the market now has a practical marker for separating traditional asset-backed securities (ABS) from operating-asset financings that use securitization technology.

That reasoning may be relevant beyond data centers, although its application will depend on transaction-specific facts. Whole business securitizations and other operating-asset financings have long relied on the presence of franchise systems, intellectual property, licensing arrangements, service platforms or infrastructure assets—not solely a discrete pool of self-liquidating financial assets—to support the conclusion that they should not be treated as Exchange Act ABS, even without definitive guidance.

Fiber, tower and other infrastructure financings raise similar considerations. Transactions that primarily monetize contracted payment streams, like receivables, leases, indefeasible rights of use (IRU) payments or customer payment rights, may look more like traditional ABS. Transactions where the issuer owns or has rights to network or infrastructure assets, and repayment depends materially on utilization, renewals, maintenance, capital expenditures, customer acquisition, operating expenses and platform performance, may support the operating-asset finance analysis instead.

Graphics processing unit (GPU) and other AI-infrastructure financings present a more difficult boundary case. As GPU financing grows, and as signs of a securitization market begin to emerge, parties should not assume the data center guidance carries over. Many GPU financings rely on equipment-financing concepts—leases, rentals, usage-payment streams, residual value, re-leasing and remarketing—that may point back toward traditional ABS. A different analysis may be possible for a particular platform, but that conclusion should be supported by the specific transaction facts.

Looking further ahead, the lines among ABS, CMBS and project finance for digital infrastructure financings may continue to converge rather than settle into a single dominant structure. Rating agencies already apply several different analytical frameworks—ABS, CMBS, corporate, project finance—to data center-related debt, driven by deal structure. For most issuers, the structural decision was never about the label. It comes down to execution: which structure will price best and close fastest. The staff’s guidance mitigates one variable in that calculation—compliance cost—but the commercial trade-offs that were already driving structure selection remain the same.

Akin advises market participants across structured finance, infrastructure finance and AI-related asset finance. We are working with clients to assess how the staff guidance may apply to existing programs, pipeline transactions and new financing structures.